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Two For The Show
Author: James Brumley (info)
Website: http://bluegrassportfolio.com
Posted: April 12th, 2007 at 9:05 am EST
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We’ve got two parts to today’s article. Both are significant to all of us though, right now in particular. You may want to keep both of the themes in your back pocket, as we may be referring back to them in the near future.
#1: A Mostly-Reliable Framework
Remember a few weeks ago when we added Fibonacci retracement levels to our repertoire? We decided to keep them in the arsenal, knowing they aren’t perfect, but still observing that they had merit.
Well, today, we’re applying them in a macro way that may explain why the indices have been spinning their wheel the last several weeks.
Just as a quick reminder, the basic Fibonacci philosophy is that there is significance in 38.2% and 61.8% retracements (and extensions as well, but that’s another story).
Take a look at what’s going on Fibonacci-wise when we look as a monthly chart of the NASDAQ. Note that we used the high and low weekly closes rather than an intra-week highs, to try and find the most significant nodes. After a giant pullback between 2000 and 2002, we have indeed made a nice recovery. However, notice anything peculiar? We’ve recouped 38.2% of what we lost, but not a hair more. That resistance line is at 2542; if it breaks, then the next theoretical landing spot is the 61.8% retracement at 3376, though we may see a pause at the 50% retracement line as well. It’s at 2953.
In the meantime, don’t be shocked that we stalled here.
NASDAQ Chart - Monthly, with Fibonacci lines
In the interest of fairness, the Dow is actually above it’s 2000 peak, while the S&P 500 is well past a 61.8% retracement of it’s bear-market losses. So, clearly the Fib line theory isn’t perfect. But, we’re still going to watch them.
#2: It’s a Numbers Game
The second part of this article comes to us from Bob Lang, manager of the Grand Slam and Extreme Options services.
We spoke a couple months ago of the significance of 1440 on the SPX. Going back to 2000 this represents a significant number. In April of 2000 (nearly 7 years ago to the day!) this was a breakdown point for the market that started a swoon that didn’t end until 2002. Later in 2000 (August), the 1440 level was established as resistance and was not captured again until just recently (Feb 13th) for the first time since then. The big drop on Feb 27th started right near this level and in the last couple of days the market is in a tug o’ war with this level.
How about a retracement level? On the monthly chart you’ll notice the index tested the 12 month moving average in March successfully at 1367 and bounced sharply. We currently see a higher high from that month in April.
S&P 500 - Monthly, with 12 month moving average
What’s it all mean? Clearly the market is short term within a consolidation mode. The longer term bull trend is still intact. Volatility has taken a major hit since spiking past the 20 level on two occasions. The market has been running higher for days….8 straight for the Dow and 6 of 7 for the NASDAQ (before Wednesday’s action). Too much bullishness? Perhaps some air needs to be let out of the market before a resumption of the bull trend. Support for the SPX comes in around 1433 (20 day moving average) and perhaps a test of the 50 day average is in order (1427).
S&P 500 - Daily, with 20 and 50 day averages
Volume the last week or so has been on the light side so we shouldn’t be surprised to see an orderly pullback. Be on your toes for the next move higher could be significant as earnings become the focus for traders the next five weeks.
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Bob Lang, James Brumley
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